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  • If you have children, your greatest financial worry is probably how you’re going to pay for their college education. You have good reason to be concerned. Besides funding your own retirement, college tuition is probably the biggest expense you will ever face. The numbers can be overwhelming. According to the College Board, tuition at private universities is averaging over $20,000 per year. Public institutions will set you back more than $5,000. Now multiply those figures by the four or five years your child will be in school. And keep in mid that those figures only represent tuition and fees. You’ll have a hot of other costs, including room and board, books and other expenses. To make matters worse, tuition has been rising six to seven percent annually over recent years. When you factor in the number of years until your children are college-aged, you could be looking at a total bill well into the six-figure range. These are just general figures. If you would like to get more exact figures numerous web sites are available to calculate future costs. Try the College Board’s site at www.collegeboard.com. Once you do the math, providing a college education for your children may seem impossible. But rest assured a college education is probably well within your reach. It won’t be easy. It will take planning, research and belt tightening. And it may even take a significant amount of debt. But it can be done by most families.
  • It must be made clear that you should not save for college at the expense of your own retirement savings. Many organizations, including the federal government, are willing and able to help your child pay for college. However, no one is likely to give you a hand-out if your retirement fun comes up short. Keep in mind that funds in a qualified retirement plan won’t count against you when applying for financial aid. So be sure to fund your retirement plans to the fullest.
  • Here’s an example of what starting early can make. Let’s say you saved $250 each month from the time your child was born. If you earned a 7% return annually, after 18 years you’d be pleased to learn you saved over $100,000 -- $101,997 to be exact. Now imagine you started saving when you child was nice years old. Instead of saving $250 a month, you put away $500 a month and earn the same 7% return. After nine years, you money will have grown only to $71,868. keep in mind, the actual amount saved in both examples is the same --$54,000. but by starting nine years earlier, you’ll have amassed over $30,000 more when it comes time to send your child to the dorm. Starting early will give you a great advantage.
  • A critical component of any investment plan is how you allocate your assets. When your children are young, say under 11, you should invest for long-term growth with a large portion of your assets invested in the stock market. Historically, the stock market has outperformed other investments over time. Time is the key. With a long time horizon, you will be able to weather the short-term ups and downs of the market As your child heads toward the teen years, you may want to direct new contributions to more conservative investments such as short-term bond funds and money market funds. When the child reaches 14, start moving all the money to safer investments that are easy to cash out. You want to know the money is available when you need it.
  • As important as asset allocation is to amassing a hefty college fund, another important decision to consider is what kind of accounts to open to hold those investments. In recent years, the federal government has been quite generous in providing valuable tax breaks to those saving for college.
  • Almost all states have at least one of these plans. However there are benefits that all plans share, including: Earnings grow tax-free and distributions are free from federal tax if the funds are used to pay for qualified educational expenses. There are no income limits on contributions. Any family, no matter how high its income, can participate. Investment minimums are low. Some states allow you to open an account with as little as $250. One child can be the beneficiary of more than once account. As a parent, you can open a 529 for your child, while grandparents or aunts or uncles can do the same. Assets are managed by a professional financial services firm. If the plan beneficiary decides not to attend college, assets in the plan can be shifted to another close relative without penalty. Also, many states do not cap the amount you can add to a 529 plan each year. Keep in mind however that to avoid paying a gift tax, you should limit annual contributions. You are not tied to the plan in your home state. Since you are free to invest in any states’ plan, it makes sense to shop around for one that best suits your needs. Many of the plans offer an adaptive allocation strategy. This is where you invest more aggressively when your child is young and as they grow older you become more conservative in your investment choices. Some plans offer funds that protect principal from inflation and offer a guaranteed rate of return. Other differences from state to state include lifetime contribution limits, investment managers, and expense ratios. Some states also offer income tax breaks for residents who choose an in-state school.
  • In some states you may be able to use the prepaid funds at an out-of-state school or a private institution. In some cases you may lose the guarantee that all tuition will be covered if you opt for a school outside of the plan. Deciding to participate in a prepaid plan demands careful consideration. On the plus side, a semester of tuition paid now at today’s prices will pay for a semester of tuition anytime in the future no matter how much costs rise in the interim. Because prepaid plans take all the risk and investment decisions off your shoulders, they are especially attractive if you are a novice investor or are especially averse to risk. On the down side, a prepaid plan will negatively affect your chances of receiving financial aid. Prepaid plans also lack the flexibility of other savings plans. It’s hard to predict in advance what school your child will want to attend. If not used, assets in the plan will be refunded to you, but most likely without the interest that has accumulated over the years. You may also face a cancellation fee. Be sure to weight the benefits and risks before jumping into any plan.
  • The Coverdell Education Savings Account was created by Congress to allow families to save for education expenses the same way they save for their own retirements. You can open an account at most banks and brokerage houses, and contribute up to $2,000 a year and invest it in any manner. Contributions to the account are not tax deductible, but funds may be withdrawn tax-free if they are used for qualified educational expenses. Overall, the ability to contribute to a Coverdell is based on your Adjusted Gross Income, or your income before you itemize deductions or take the standard deduction. The ability to contribute to a Coverdell is based on your Adjusted Gross Income, or AGI. This is your income before you itemize deductions or take the standard deduction.
  • Parents use the Uniform Gift to Minors Act to open custodial accounts for their children. UGMA accounts allow unlimited investment options as well as parental control over assets until children are 18 or 21, depending on the state. Be aware that income in these accounts may be subject to the “kiddie tax.” These accounts do have a tax advantage over taxable accounts you hold in your name. The drawback is at the age of 18 or 21 all the money belongs to the child to do with what they wish. In addition, UGMA accounts negatively impact financial aid. Assets in a child’s name are counted much more heavily than in the assessment of your ability to pay. Savings bonds are also a popular vehicle for college savings plans. Series EE and I bonds provide a decent rate of return with little risk. In addition, interest earned on bonds is free from local and state taxes, and federal taxes may be deferred until the bonds are redeemed or reach maturity. As an added incentive, for some taxpayers, interest on these bonds may be totally tax free if used to pay qualified educational expenses. However, this tax break is eliminated at certain income levels. Even if your income is too high to qualify for the interest exclusion, keep savings bonds in mind if you think you may be retired when you children are in college. With a lower income in retirement, you may qualify to exclude bond interest from your income.
  • The best way to ensure your child gets a degree is to save the funds yourself. You should start saving as early as possible and contribute as much as you can. But what happens when, despite your best efforts, your college nest egg comes up short? Never assume you won’t qualify for financial aid. The first step to getting financial aid is to complete the Free Application for Federal Student Aid in January of the year your child will begin college. Aid is awarded on a first-come, first-served basis, so be sure to complete the paperwork as early as possible. The information you supply will be used to generate a Student Aid Report that will detail your expected family contribution, or your EFC. As a parent you are expected to contribute 25 to 30 percent of your current income to meet educations costs. You are also expected to contribute 6 percent of your assets, excluding your home and retirement accounts. Your child on the other hand is expected to use up to 35 percent of their assets to pay the bills. Keeping assets in your name is helpful if you are hoping to receive financial aid. Your EFC is then subtracted from the cost of education, and this is used to determine your family’s financial need. Another way to supplement the cost of college is through grants and scholarships. These are awards that do not have to be repaid. Grants are given by the federal or state governments or through the individual college. Individual schools are more likely to provide grants to attract certain types of students or to encourage study in a particular field. On the other hand, scholarships are most often awarded on merit. Loans may also make up a large portion of your student aid package. Most are offered through federal government programs. Interest rates are low, repayment periods are long, and repayment doesn’t begin until schooling is completed. Another way to help ease the burden once your child is in college is through the use of tax credits and deductions. Keep in mind that tax credits reduce your tax liability dollar for dollar. As such, they are more valuable than deduction which lower your taxable income. A couple to keep in mind are, The Hope Credit, and the Lifetime Learning Credit.
  • If you still have reservations, or you don’t want to burden yourself or your child with a mountain of debt, there are several other options for navigating the college funding maze. Encourage your child to take Advanced Placement classes during the last two years of high school for college credit. They can ear a whole semester’s worth of credit and save hundreds or thousands in tuition expenses. Ask your child to consider community college where they can satisfy core requirements at a much lower price. After a year or two your child can transfer to a more prominent school and earn the more prestigious diploma. As an added savings, your child can live at home over that time and save thousands on room and board. Think about asking your child to postpone college for a year. With a full-time job and diligent saving, your child could earn enough money to put a dent in the first year’s tuition. Encourage your child to help himself by helping others. Full-time volunteers with Americorps, the Peace Corps, and members of the armed services can all earn awards to use towards educational expenses or to repay student loans.
  • Here are some useful tips as you wrestle with the complex question of college planning. It is always wise to involve your child in the financial-planning process. Children should appreciate the high and rising cost of a college education and understand the sacrifices required. You and your child can absorb some of the cost through a combination of work, scholarships and grants, and loans. The entire college financing process can be a valuable lesson in money management. To encourage frugality, offer your child a course in consumer economics before they head off to the dorm. Persuade your child to buy used textbooks, to attend free or low-cost college-sponsored events and to limit the use of phones by emailing. Most crucial of all, teach your child to use a credit card only in case of emergency. Convince them that if they can’t afford to pay cash for it, they probably don’t need it. Three points key to financing a college education: Begin saving as soon as possible, Encourage your child to be an achiever throughout their school years, and Make a serious joint effort with your child, and perhaps a CPA, to keep informed on ever-changing savings plans, tax laws, and financial aid requirements. Thank you. Now I’ll be happy to take your questions.

Slide 1 Presentation Transcript

  • 1. College Planning: Easing the Financial Burden Advice from CPAs
  • 2. Easing the Financial Burden
    • How you’re going to pay for children’s college education?
    • The numbers can be overwhelming
    • It won’t be easy
    • It will take planning, research and belt tightening
    • It might even take debt
  • 3. Easing the Financial Burden
    • Funds for paying for a child’s college
    • education will usually comprise three sources:
      • Savings
      • Financial aid
      • Tax relief
    • You should not save for college at the
    • expense of your own retirement savings
  • 4. Easing the Financial Burden
    • It pays to start early
    • Take advantage of the power of compounding
      • The earlier you start the more interest
      • you will earn and the more you will save
  • 5. Easing the Financial Burden
    • Consider how to allocate your assets
      • Stock Market
      • Short-term bond funds
      • Money Market fund
    • You want to know the money is available
    • when you need it
  • 6. Easing the Financial Burden
    • Valuable tax breaks to consider
    • while saving for college:
      • 529 Savings Plan/Qualified Tuition Program
      • Prepaid Tuition Plan
      • Coverdell Education Savings Account
      • Uniform Gift to Minors Act
      • Savings Bonds
  • 7. Easing the Financial Burden
    • State-sponsored 529 Savings Plan,
    • also known as a Qualified Tuition Program
      • Earnings and distributions are tax free
      • No income limits on contributions
      • Investment minimums are low
      • One child can be beneficiary of more
      • than one account
      • Assets managed by a professional financial
      • services firm
  • 8. Easing the Financial Burden
    • Prepaid Tuition Plan
      • Pay future tuition at a state college
      • at today’s lower rates
  • 9. Easing the Financial Burden
    • Coverdell Education Savings Account
      • Save for college the same way to save
      • for your retirement
  • 10. Easing the Financial Burden
    • Uniform Gift to Minors Act
    • Unlimited investment options
      • Parental control over assets
      • May be subject to “kiddie tax”
    • Savings Bonds
      • Series EE and I bonds
  • 11. Easing the Financial Burden
    • Nest Egg Falling Short?
      • Use of financial aid
      • Loans
      • Tax credits and deductions
  • 12. Easing the Financial Burden
      • A few more options…
        • Advanced Placement classes
        • Community College
        • Postpone for a year
        • Volunteer
  • 13. Easing the Financial Burden
    • Useful Tips…
      • Involve your child in the financial
      • planning process
      • Encourage frugality
      • Begin saving as soon as possible
      • Encourage your child to be an achiever
      • Make a joint effort